Central Bank of Indonesia Leaves Interest Rates Unchanged in April
The central bank of Indonesia (Bank Indonesia) kept its benchmark interest rate (seven-day reverse repo rate) at 4.75 percent at the April policy meeting (19-20 April 2017), while its deposit facility rate and lending facility rate stayed at 4.00 percent and 5.50 percent, respectively. Bank Indonesia considers the current interest rate environment appropriate to face global uncertainties as well as rising inflationary pressures at home.
Bank Indonesia said there are indications of a more promising economic outlook for advanced economies. However, several risks continue to demand vigilance, particularly the current discourse on the US Federal Reserve reducing its overall balance sheet along with geopolitical factors such as rising tensions in Korea and the first round of French elections. Within Indonesia, Bank Indonesia will continue to monitor the impact of administered price adjustments (electricity tariffs) on inflation as well as the ongoing consolidation in the corporate and banking sector (reflected by bleak credit growth), which has undermined the impact of economic stimuli.
The global economic outlook is expected to improve, albeit there remain several risks. The gains are supported by the ongoing strengthening of US economy and accompanied by improvements in the economies of the European Union and China. US growth is becoming increasingly solid on the back of consumption with positive labor market conditions and improved investment, primarily in the energy sector as the crude oil price continues to rise. Furthermore, economies in Europe could potentially improve on consumption and export gains. Moreover, China’s economy is expected to remain robust, supported by consumption and investment, particularly infrastructure investment. While international commodity prices, including oil, are predicted to remain high, global inflation is predicted to remain under control. Moving forward, several global risks will continue to demand vigilance, including the Federal Reserve’s plan to reduce its overall balance sheet and the impact on global financial markets, the Fed Funds Rate (FFR) hike plans, and recent geopolitical conditions in several regions.
Economic growth momentum in Indonesia is expected to remain well in the first quarter of 2017, albeit below previous expectations. The main sources of this growth are stronger investment, solid consumption and positive export performance. First-quarter investment increased on building and non-building investment. Non-building investment improved on the back of commodity price hike, as reflected in the increase of heavy machinery sales for mining and farming. The hike in commodity prices also promoted export growth. Meanwhile, household consumption growth can potentially moderate slightly in the first quarter of 2017, indicated by slower growth of retail and motorcycle sales, as an effect of ongoing consolidation in the corporate sector. Economic growth is predicted to accelerate in the second quarter of 2017, supported by stronger investment and export performance, while consumption should remain relatively stable. Meanwhile, rising commodity prices and stronger demand due to the global economic recovery are expected to drive exports and investment. Looking forward, the role of fiscal stimuli, in terms of catalyzing economic growth, should be maintained.
Indonesia's trade balance recorded another USD $1.23 billion surplus in March 2017, primarily supported by a non-oil and gas trade surplus. Indonesia's trade balance surplus reached USD $3.93 billion in the first quarter of 2017, more than twice of last year’s surplus of USD $1.66 billion over the same period. Meanwhile, foreign capital inflows to financial markets in Indonesia reached USD $5.33 billion in the first quarter of 2017. Consequently, the position of reserve assets at the end of March 2017 stood at USD $121.8 billion, equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, which is well above the international standard of three months.
The Indonesian rupiah continued to appreciate in March 2017, supported by macroeconomic stability and the positive perception of investors towards Indonesia's promising economic outlook, coupled with easing global risks. Throughout Q1-2017, the rupiah appreciated 1.09 percent (year-to-date) to close at IDR 13,326 per US dollar. Rupiah appreciation was driven by an influx of non-resident capital due to attractive domestic investment assets as well as sounder global factors. Foreign capital inflows were primarily drawn to stocks and government debt securities (SUN).
The consumer price index of Indonesia recorded deflation in March 2017 as the supply of foodstuffs increased. Deflation was recorded at 0.02 percent month-on-month (m/m), contrasting inflation of 0.23 percent (m/m) in the preceding month. The main contributors to March deflation were volatile foods after the harvests of several food crops boosted the supply-side. Furthermore, controlled prices were also supported by low core inflation, decelerating to 0.10 percent (m/m). Administered prices declined due to lower airfares, which reduced the impact of hikes to electricity rates. Bank Indonesia still sees Indonesian inflation reaching somewhere in its 3 - 5 percent (y/y) target range at end-2017 although there remain challenges (administered price adjustments as part of the central government's ongoing energy reforms as well as the expected seasonal spike of inflationary pressures during the approach to the holy fasting month).
Maintained banking industry resilience and stable financial markets continued to support solid financial system stability. In February 2017, the capital adequacy ratio (CAR) of the national banking industry was recorded at 23.0 percent and the liquidity ratio at 22.2 percent, while non-performing loans (NPL) ratio stood at 3.2 percent (gross) or 1.4 percent (net). The transmission of easing monetary and macro-prudential policy continued, albeit restrained by banks' prudence in managing credit risks. Based on the types of credit, the banks lowered interest rates on working capital loans most significantly (113 bps, y/y), followed by investment loans (83 bps, y/y) and consumer loans (37 bps, y/y).
Credit growth in February 2017 was recorded at 8.6 percent (y/y), up from 8.3 percent (y/y) the month earlier but curbed by corporate and banking consolidation. On the other hand, deposit growth stood at 9.2 percent (y/y) in February 2017, down from 10.0 percent (y/y) in January. On the other hand, non-bank economic financing through the capital market in the form of initial public offerings (IPO) and rights issues, corporate bonds and medium-term notes (MTN) continue to increase. Consistent with expectations of stronger economic growth and the ongoing impact of existing monetary and macro-prudential policy easing, credit and deposit growth in 2017 are expected to accelerate to 10-12 percent and 9-11 percent respectively.
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